Flexsteel Industries, Inc. — Form 10-Q Summary
Period clarification: The filing covers the three months ended September 30, 2012, Flexsteel’s first quarter of fiscal 2013, not 2011 Q1. Comparative figures are for the three months ended September 30, 2011. Financial statements are unaudited; amounts below are in U.S. dollars.
Business context and results
Flexsteel manufactures, imports and markets upholstered and wood furniture for residential, commercial, hospitality, health care and motor vehicle applications. It reported quarterly net sales of $91.2 million, up 11.9% year over year. Residential sales rose 15.7% to $72.3 million; commercial sales were $18.9 million, down 0.5%.
Key financial metrics
- Profitability: Gross margin was 23.1%, versus 23.3% a year earlier. Operating income increased to $4.4 million from $3.6 million; operating margin improved to 4.8% from 4.5%. Net income was $2.9 million, compared with $2.4 million. Diluted EPS was $0.40 versus $0.34.
- Expenses and tax: SG&A rose to $16.7 million from $15.3 million, but declined as a share of sales to 18.3% from 18.8%. The effective tax rate was 36.9%, compared with 36.7%.
- Cash flow: Operations used $3.5 million of cash, versus $3.0 million used in the prior-year quarter. Investing activities used $3.2 million, including $3.0 million of capital expenditures; financing activities used $0.8 million, primarily for dividends. Cash fell $7.4 million to $6.5 million.
- Liquidity and debt: Working capital was $102.8 million, compared with $103.7 million at June 30, 2012. The company had no borrowings outstanding and reported $12.5 million of borrowing availability under its credit agreement. The facility expires June 30, 2013; the company reported covenant compliance.
- Balance sheet: Inventories increased to $85.5 million from $82.7 million, primarily to support higher residential sales and broader product offerings. Trade receivables increased to $35.8 million from $33.6 million, which management attributed mainly to collection timing. Total liabilities were $41.4 million and shareholders’ equity was $141.9 million at September 30, 2012.
- Shareholder returns: Dividends declared were $0.15 per share, up from $0.10. Shares outstanding at quarter-end were 7,006,029.
Changes, outlook and risks
Revenue growth was driven by residential sales; commercial sales were approximately flat. Gross margin edged down, while lower SG&A as a percentage of sales helped lift operating and net margins. Capital spending increased to $3.0 million from $0.6 million in the prior-year quarter. Management expected approximately $3.0 million of additional fiscal 2013 capital expenditures and believed cash and credit resources were adequate for operating and capital needs.
Management expected moderate top-line growth through the end of calendar 2012, with residential growth from existing customers, products and portfolio expansion, and commercial order trends continuing. It described its optimism as guarded because of uncertainty around elections, the economy and consumer confidence. The filing gives no formal earnings or full-year revenue guidance.
Risks include furniture-industry cyclicality, supply-chain and import disruptions, tariffs, raw-material, labor and fuel costs, pricing pressure, competition, customer credit exposure, product introductions and general economic conditions. Flexsteel is a defendant in Indiana groundwater-contamination litigation concerning property it once owned. The company disputes responsibility, has not recorded an accrual because losses cannot be reasonably estimated, and incurred $0.6 million of related legal expenses in the quarter. Insurance coverage was undetermined.
Important facts for investors to verify
- Whether residential growth and the current commercial order trend continued after the quarter, and whether margins held up.
- Whether inventory growth converted into sales and cash, given negative operating cash flow and the increase in receivables.
- Actual capital expenditures, cash levels, dividend payments and use of the credit facility; the agreement expires June 30, 2013.
- Developments in the Indiana litigation, including potential loss exposure and insurance coverage.
- The filing’s fiscal-period labeling: the report is for the quarter ended September 30, 2012 (fiscal 2013 Q1), despite the requested metadata specifying 2011 Q1.